DEBTOR’S OMNIBUS REPLY TO OBJECTIONS TO DEBTOR’S RETENTION APPLICATIONS TO THE HONORABLE MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE: Dewey & LeBoeuf LLP, as debtor and debtor in possession (“DL,” the “Firm” or the “Debtor”) in the above-captioned case (the “Chapter 11 Case”), by its proposed counsel, Togut, Segal & Segal LLP, respectfully submits this omnibus reply (“Reply”) to the objections (each, an “Objection” and, together, the “Objections”) to the Debtor’s applications to retain professionals (collectively, the “Retention Applications”); Objections have been filed by: (1) the Pension Benefit Guaranty Corporation (“PBGC”) to the Debtor’s applications to employ (a) Keightley & Ashner LLP (“K&A”) as special pension benefits counsel (the “K&A Application”) and (b) Proskauer Rose LLP (“Proskauer”) as special employment and litigation counsel (the “Proskauer Application”) [Docket No. 141]; (2) the United States Trustee (the “UST”) to the

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Debtor’s applications to employ (a) Togut, Segal & Segal LLP (the “Togut Firm”) as bankruptcy counsel (the “Togut Application”); (b) Proskauer; (c) K&A; (d) Goldin Associates, LLC (“Goldin”) as special consultant (the “Goldin Application”); (e) On-Site Associates, LLC (“On-Site”) as collection agent (the “On-Site Application”); (f) Development Specialists, Inc. (“DSI”) as wind down consultant (the “DSI Application”), and (g) Sitrick & Company (“Sitrick”) as corporate communication consultant (the “Sitrick Application”) [Docket No. 142]; and (3) the Official Committee of Former Partners (the “Former Partners Committee”) and the Official Committee of Unsecured Creditors (the “Creditors’ Committee” and, together with the Former Partners Committee, the “Committees”) to the Debtor’s applications to employ (a) the Togut Firm; (b) Jonathan A. Mitchell and Zolfo Cooper Management LLC (“Zolfo Cooper”) as Chief Restructuring Officer and wind-down consultants (the “Zolfo Application”); (c) Goldin; (d) Sitrick; (e) On-Site; (f) DSI; (g) Proskauer, and (h) K&A [Docket No. 157]. The Debtor respectfully represents: PRELIMINARY STATEMENT It is important to note at the outset that the Retention Applications were only made after close consultation with the secured lenders and their counsel, Kramer Levin Naftalis & Frankel LLP and Bingham McCutchen LLP, who were diligent in insisting that the Debtor be careful in who it hired and at what cost. After all, the professional fees are being paid out of the lenders’ cash collateral, pursuant to a tight budget. Indeed, at this point in the case, the entire Chapter 11 proceeding is being funded by the secured lenders whose more than $225 million of claims, at least in terms of priority of payment, represent the largest stake in the case. The Debtor did not make these retention choices in a vacuum; it made them with serious creditor oversight. The Debtor’s retention choices were closely scrutinized. They were made with rhyme and reason. It 2

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is not a coincidence that the Retention Applications were filed just two days after this Court entered the Final Cash Collateral Order (as defined below). As detailed below, the Debtor’s choices should be approved and the Retention Applications granted. The Objections raise three key concerns relating to the Retention Applications. First, the Objections insist that the Debtor has not established the necessity for hiring multiple professionals. Specifically, the Objections question the necessity for the retention of three sets of lawyers to represent the estate but the Objections ignore the obvious and are thus mechanical, and not thoughtful. The Togut Firm regularly appears before this Court and the Objectors know that Togut Firm is a highly specialized bankruptcy boutique that has particular expertise in bankruptcy and reorganization matters but does not have other departments to handle tax, employee and other practice areas. Whenever the Togut Firm is hired, the Debtor must also rely on other counsel to handle nonbankruptcy matters. As explained below and in the Declaration of Harold Ashner in support of this Reply, that is why the Debtor retained K&A to advise the Debtor on PBGC-related issues regarding its pension plans, and Proskauer, the Debtor’s longstanding employee benefits counsel, to advise the Debtor on issues relating to its 401(k) plan (which includes a profit sharing contribution) based on Proskauer’s 14 years of institutional knowledge as special counsel to DL and its predecessor firms on employment related matters. This is not a proliferation of counsel that can be objectionable. The services provided by each of these firms are separate, distinct, necessary and in the best interests of the Debtor’s estate. Moreover, there is a strong argument that since each firm is addressing discrete, specialized needs of the Debtor, the estate benefits by getting the best services for those particular needs. And the cost is less too; the Togut 3

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Firm’s billing rates are below those of a megafirm that has all of the practice areas that may be implicated in what is believed to be the largest bankruptcy case ever to involve a law firm. So while one could argue that there should be only one megafirm instead of three firms doing the work, the cost would be greater. And as explained below, continuing to use Proskauer is more efficient and less expensive than any alternative. So, if efficiency and cost matter, on that basis alone, the Objections should be overruled. The retentions of Zolfo Cooper, DSI and On-Site are also necessary and beneficial to the administration of the Chapter 11 Case, as each firm serves a distinct and important purpose. As set forth in the Declaration of George Abodeely in support of the Reply, On-Site was retained (only) as a collection agent to assist the Debtor in all matters relating to the collection of receivables, its largest asset. As set forth in the Declaration of William A. Brandt, Jr. in support of the Reply, DSI was retained to provide pre-petition wind-down consulting services in connection with lease and property disposition matters. Zolfo Cooper was retained to pick up where DSI left off by providing a Chief Restructuring Officer and post-petition wind-down services to the Debtor in this Chapter 11 Case. The only reason that DSI and Zolfo Cooper worked together in the initial post-petition period was for a smooth transition, and at the Chief Restructuring Officer’s request. DSI’s work is now nearly complete.1 As set forth below and the declarations in support of this Reply, the services provided by DSI, Zolfo Cooper and OnSite have been carefully structured -- in consultation with the Debtor and its secured lenders -- to avoid any risk of overlap.

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1

To be paid for its work under the Bankruptcy Code, DSI must be first retained. That is not to say that DSI will have a continuing role in the case after a retention order is entered.

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Second, the UST and the Committees argue in their Objections that retainers held by the Debtor’s professionals should be disclosed and applied against the respective professional’s first interim fees awarded in the Chapter 11 Case. Additionally, the Committees argue that such retainers should reduce the approved budget allotted to each respective professional pursuant to the Court’s Final Order (1) Authorizing Use of Cash Collateral, (2) Granting Adequate Protection, and (3) Modifying the Automatic Stay, dated June 13, 2012 [Docket No. 91] (the “Final Cash Collateral Order”). While not required by applicable law, each of the Debtor’s professionals holding retainers as of May 28, 2012 (the “Petition Date”), except for the Togut Firm and On-Site, has agreed to apply their respective retainers to the first interim fees awarded in the Chapter 11 Case. As noted, the cash collateral budget is the result of hard bargaining by the secured lenders to keep costs contained and it puts the professionals at risk. There is an assurance of budgeted funds to pay Court-allowed compensation for services rendered through the end of July, but not beyond. Until a further cash collateral budget covering the post-July period is negotiated by the parties and approved by Court order, the professionals can only look to the dark side of the moon. So, with good reason, none of the Debtor’s professionals can reasonably be asked to forfeit the amounts allocated to them under the highly negotiated and agreed budget approved by the Court pursuant to the Final Cash Collateral Order, and none of them will do so. Any such reduction would be contrary to the terms of the Final Cash Collateral Order and was not contemplated by the Debtor’s professionals or the secured lenders when they agreed to the budget set forth therein. The Committees’ argument that they were not aware that the Debtor’s professional held retainers as of the Petition Date is simply not credible and should not be a basis to overturn the budget approved by the Court’s Final Cash Collateral Order. In a case like this one, the Togut retainer is more important than ever. If the Commit5

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tees are unhappy with the Final Cash Collateral Order, they are required to follow the appropriate procedures to amend it. Third, the Objections loudly contend that the Proskauer retention does not meet the conflict standards applicable to professionals retained under section 327(e) of the Bankruptcy Code, again ignoring what makes sense to do in this case. As detailed below and in the annexed supplemental declaration of Lawrence Sandak, Proskauer has been retained for a limited discrete purposes – to continue its long representation of the Debtor in maintaining the tax qualified status of the Debtor’s 401(k) and profit sharing plan, to represent the Debtor with respect to alleged violations of the WARN Act, and to act as litigation counsel with respect to a dispute with the PBGC. Proskauer has counseled the Debtor and its predecessor firms on its employee benefit plans for many years – long before the Debtor’s wind-down and the departure of certain DL partners, attorneys and staff for Proskauer. Proskauer has counseled the Debtor and its predecessor firms on its employee benefit plans for the past many years – long before the Debtor’s wind-down and the departure of certain DL partners, attorneys and staff for Proskauer. Especially where costs matter, as they do here, it would be entirely inefficient for another firm to step in to learn what Proskauer has already done on matters that Proskauer is about to complete. The potential conflicts of interest raised by the Objections are entirely academic and, more importantly, totally unrelated to Proskauer’s work or the Debtor’s estate. For extra comfort, ethical walls have been built to screen the former DL partners and staff from the work that Proskauer will perform for the Debtor’s estate. For these reasons, as described more fully below, Proskauer’s limited retention is appropriate under the applicable standards of section 327(e) of the Bankruptcy Code and should be approved.

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Fourth, the UST’s Objection to On-Site’s retention and payment of contingent fees without the need for filing a fee application should be overruled. As explained below and in the Declaration of George Abodeely in support of this Reply, similar arrangements have been approved in several law firm bankruptcy cases and the proposed retention is entirely appropriate and consistent with section 328(a) of the Bankruptcy Code. And again, those fees are coming out of the secured lenders’ collateral and the secured lenders participated in, and approved, the contingency arrangement. Finally, the UST raises a number of discrete objections relating to disclosures, each of which is cured herein or in supplemental declarations filed contemporaneously with this Reply. For the avoidance of doubt, each of the Debtor’s professionals will disclose any rate increases during the pendency of the Chapter 11 Case and each proposed retention order will be revised to incorporate the language requested by the UST to address this point. REPLY A. The Proposed Retentions Do Not Overlap and Should Be Approved as Necessary to the Administration of the Debtor’s Estate 1. Under section 327(a) of the Bankruptcy Code, a debtor may seek

court approval to employ attorneys, accountants, or other professional persons to represent or assist the trustee or debtor in possession in carrying out the duties to the estate. See 11 U.S.C. § 327(a). In order to be retained under section 327(a), the professional must be both disinterested and not hold or represent any interest adverse to the estate. In re Borders Group, Inc., 456 B.R. 195 (Bankr. S.D.N.Y. 2011) (quoting In re Project Orange Assocs., LLC, 431 B.R. 363, 369 (Bankr. S.D.N.Y. 2010). Although not supported by the text of section 327(a), some courts also read in a requirement that the retention be “rea-

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sonably necessary in the administration of the estate.” See 3 Collier on Bankruptcy ¶ 327.02[1] (16th Ed. Rev.). 2. Section 327(e) of the Bankruptcy Code authorizes the retention of

counsel who previously represented a debtor prepetition provided that: (a) the appointment is in the best interest of the debtor's estate; (b) counsel does not hold an interest adverse to the estate with respect to the matter for which counsel is to be employed; and (c) the specified special purpose for which counsel is being retained does not rise to the level of conducting the bankruptcy case for the debtor in possession. See 11 U.S.C.A. § 327(e). See also In re AroChem Corp., 176 F.3d 610, 622 (2nd Cir. 1999); JMK Constr. Group, Ltd., 441 B.R. 222, 230-31 (Bankr. S.D.N.Y. 2010). 3. The language of section 327(e) expressly states that counsel re-

tained under such provision must be “an attorney that has [previously] represented the Debtor.” Its intended use is for counsel that was handling work prepetition be permitted to continue its work in the bankruptcy case. See In re Polaroid Corp., 424 B.R. 446, 451-52 (Bankr. D. Minn. 2010) (Trustee successfully retained law firm as special counsel under §327(e) where law firm previously served as Debtor’s counsel in adversary proceedings before the case was converted and the law firm’s employment was in the best interests of the bankruptcy estate since the law firm had “significant expertise” in the subject matter as result of its previous employment by the Debtor). 4. Whether employment is reasonable cannot be determined through

tain Sitrick, K&A and Proskauer because their services are largely complete and are no longer necessary to the administration of the estate. In other words, the PBGC and the Committees ask the Court to penalize these professionals for performing their services so efficiently that they largely completed the tasks for which they were retained before their retention applications could be heard by the Court. This would not only be manifestly unfair but is contrary to the standards authorizing a debtor in possession to retain professionals necessary to the administration of the estate. As detailed below, while the services required of Sitrick, K&A and Proskauer going forward may be minimal to nonexistent, the post-petition services that they have already provided were necessary and their retentions should be approved nunc pro tunc to the Petition Date. Without a retention order, they cannot be paid. B. The K&A Retention (i) Overview 6. The K&A Application requests authorization for the employment

and retention of K&A as special pension benefits counsel to the Debtor to provide advice and guidance relating to “Pension Matters,” which the K&A Application defined as “employee benefits issues, including advice and guidance that will allow the Debtor to evaluate the claims filed by PBGC in the [Debtor’s bankruptcy case] and to develop a strategy to resolve such claim” (emphasis added). The non-exhaustive listing of examples in the retention application (regarding evaluation and resolution of PBGC’s claims) looked to the future as of June 15, 2012, when the retention application was filed, rather than to the future as of May 28, 2012, the Petition Date. K&A performed the bulk of its services during the May 28 to June 15 period.

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7.

As of the Petition Date, a PBGC lawsuit against DL was pending in

the Southern District of New York, the resolution of which could have had significant consequences for the DL bankruptcy estate, as discussed in the supplemental Declaration of Harold Ashner (the “Ashner Declaration”) in support of the Reply. That lawsuit, which K&A was heavily involved in, was settled on June 13, 2012, in a manner that was advantageous and beneficial to the Debtor’s estate, as discussed in the Ashner Declaration. 8. In part because of the pendency of this litigation on the Petition

Date, and the consequences its resolution could have on the DL bankruptcy estate, the Debtor’s retention application for K&A requested approval of K&A’s employment nunc pro tunc to the Petition Date, noting both the “extraordinary circumstances presented by these cases” and that the “complexity and intense activity that have characterized this case has necessitated that the Debtor and its professionals focus their immediate attention on certain matters and promptly devote resources to the affairs of the Debtor pending submission and approval of this [retention] Application.” 9. The legal services K&A provided to DL during the post-petition

period went well beyond defending DL against the PBGC lawsuit. Among other things, K&A assisted the Debtor in connection with evaluating the appropriateness of PBGC’s various requests for information, and developing and reviewing information to consider providing to PBGC; evaluating the legal basis for PBGC’s claim that it may enforce two subpoenas against DL notwithstanding the automatic stay; dealing with PBGC in connection with its information requests and efforts to enforce its subpoenas against DL; evaluating issues relating to whether particular entities may be part of a DL controlled group and thus potentially liable to PBGC; evaluating options for settlement with PBGC in connection with possible sales of foreign interests; advice on PBGC reporting requirements; advice on PBGC’s ability to pursue collection, and/or perfection 10

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and enforcement of liens (whether under IRC Section 430(k) or ERISA Section 4068) against non-debtor entities that are, or may be, part of a DL controlled group; advice on PBGC rules and practices regarding determinations of net worth for purposes of pursuing liens against non-debtors and pursuing priority bankruptcy claims against debtors; coordinating with counsel for the secured creditors in connection with positions to take, and resources to expend, in defending against and in settling the PBGC lawsuit; evaluating the appropriateness of DL cooperating in efforts to ensure payment of various fees and expenses from plan assets; and addressing concerns of DL partners and employees regarding pension plan termination, PBGC trusteeship, and related benefit payment and other issues. PBGC in its objection erroneously assumes that the only legal services K&A provided during the post-petition period were those involved in defending DL against the PBGC lawsuit. 10. K&A could potentially continue to provide DL with legal services

relating to PBGC matters, including but not limited to issues relating to PBGC claims that may be asserted against the Debtor’s estate. Significantly, the PBGC alleges in its Objection that it is the largest unsecured creditor in this Chapter 11 Case. Accordingly, it is reasonable to expect that future issues may arise in the Chapter 11 Case that will require the advice and expertise of K&A, as special pension benefits counsel to the Debtor. Notwithstanding the potential need for future services, the Debtor and K&A have agreed that if there is a need for K&A to provide services to the Debtor’s estate after July 9, 2012, the Debtor will provide notice to the Committees and the U.S Trustee and, if appropriate, request further authorization from the Court. (ii) K&A’s Services Are Not Duplicative of Other Firms’ Services 11. PBGC asserts that K&A’s legal services are duplicative of those

provided by Proskauer, and the UST questions whether K&A’s legal services are dupli11

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cative of those provided by Proskauer and the Togut Firm. K&A’s legal services in addressing PBGC-related issues are based on its unique and extensive experience and expertise in dealing with those issues and are in no way duplicative of legal services provided by other firms. 12. Although K&A worked with Proskauer in resolving the PBGC law-

suit, this is entirely consistent with how K&A works with various other law firms both within and outside the bankruptcy context. K&A’s practice focuses very heavily on PBGC-related issues, based on the extensive experience that K&A’s professionals have had working for PBGC in various responsible legal, actuarial, policy, and operational roles and their additional experience, while with K&A, in providing legal and other services on a wide variety of PBGC-related issues to major law firms, actuarial consulting firms, investment banking firms, and employers of all sizes, including many Fortune 100 companies. But K&A is a small firm that does not take the lead in litigation matters, instead partnering with other firms that have a significant litigation practice, with K&A providing substantive and technical input on PBGC-related issues. That is the approach that the Debtor determined was the most efficient and cost-effective method to resolve the PBGC lawsuit, given K&A’s expertise and prior involvement with PBGC in this case (and many others) and Proskauer’s ability to take the lead in the litigation. 13. Many important PBGC-related issues have arisen in this case, going

well beyond those that were involved in the PBGC lawsuit. K&A has unique experience and expertise in dealing with such issues. Taken together, the K&A professionals have over 150 years of experience in responsible legal, actuarial, policy, or operational roles working for PBGC, including as General Counsel; Deputy General Counsel; Senior Assistant General Counsel for ERISA/Bankruptcy Matters; Assistant General Counsel 12

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for Legislation and Regulations; Assistant Chief Counsel; Senior Legal Advisor; Deputy Manager, Actuarial Service Division; and Manager, Operations and Policy Support Staff. 14. The responsibilities of the K&A professional staff, both attorneys

and advisors, while working for PBGC included having personal and substantial roles in many important PBGC cases (either individually or through hands-on supervision of the assigned teams); developing persuasive arguments regarding PBGC’s claims and presenting the arguments to the stakeholders and courts; in negotiating settlements with those stakeholders; developing the legal, actuarial, and operational policies and procedures that defined PBGC’s interpretation of its statutory rights and responsibilities, including those applicable to termination of pension plans and the liabilities that result therefrom; developing and issuing rulings and regulations to give those policies the force of law; and preparing legal memoranda and arguments explaining and defending those policies, followed by pursuing PBGC positions in courts or otherwise to conclusion, whether by litigation or negotiation. 15. The Debtor in this case was required to make informed judgments

regarding various PBGC issues in order to maximize the return to all stakeholders to the extent possible, and needed K&A’s highly specialized experience and expertise to help level the playing field in its dealings with PBGC and to do so in a cost-effective manner, with a minimum of time needed to research the PBGC issues that the K&A professionals are fully familiar with. (iii) Application of pre-petitioner retainer to first interim fees 16. The UST Objection asked whether K&A has a balance remaining on

its retainer as of the Petition Date and, if so, whether K&A will apply the retainer to its first interim fee application. K&A has a balance on its pre-petition retainer (which, in13

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cluding replenishments, totaled $200,000) of $7,062.50, and has agreed to apply that balance to its first interim fees that are awarded. (iv) Disclosure of representation of party in interest 17. The UST Objection makes note of K&A’s disclosure that it has rep-

resented and continues to represent an undisclosed party in interest in matters wholly unrelated to the Debtor’s case, and asked that K&A disclose the identity of the party in interest, the percent of revenue that such representation generates for K&A, and whether K&A can be adverse to such client. The requested information is in the Ashner Declaration. (v) Application of Section 330 to K&A’s Fees and Expenses 18. The UST objects to the application of section 328(a) to the Court’s

and the parties’ review of K&A’s fees, and takes the position that the reasonableness standard of section 330 should be used instead. The Debtor has been advised that K&A agrees. C. The Proskauer Retention 19. Proskauer has represented DL and its predecessor firms for the past

14 years on employee benefit matters. Based on its extensive expertise relating to the Debtor’s employee and partner benefit issues, the Debtor seeks to have Proskauer perform certain discrete post-petition services under section 327(e) of the Bankruptcy Code. 20. Specifically, the Debtor has a 401k plan, with a profit-sharing com-

ponent (PSP) for partners and staff, and a cash balance pension plan for partners. In order to satisfy discrimination testing (the test to ensure that a plan is not favoring the highly compensated employees, in this case, for the most part, partners), the Firm makes a 7.5 % contribution to the PSP on behalf of staff on an annual basis. The contribution made by partners to the PSP came out of their paychecks (though a “Firm” con14

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tribution) by deductions starting in January of each year. The same was the case this year, so partners (through the Firm contribution) had put in substantial amounts by May. The contribution for the staff was traditionally made in September. Contributions are no longer being made this year. Unless the Debtor can effectuate an appropriate allocation of the contributions in respect of partners to the staff accounts, it is possible that the Debtor’s plans could lose their tax-qualified status. This is not just a partner issue but an employee issue as well. 21. Sometime in April or early May and prior to its seeking bankrupty

protection, DL asked Proskauer to (a) determine whether there was a problem and (b) develop a solution. While Proskauer was looking at the issues, it, together with the

attorneys representing the fiduciaries now responsible for the various plans at issue, advised DL to stop all further withdrawals by partners from the 401k plan (in which the PSP contributions are deposited) to accomplish the repair more easily. 22. The suspension of rollovers should end shortly, but the Debtor

needs to reallocate some contributions in order to preserve the favorable tax treatment, which will take a little time. Most of the work is being done by the plans’ fiduciaries. However, the Debtor needs Proskauer to advise on occasional issues and to terminate the 401k plan as soon as the tax concerns are resolved. This is not a major task but it needs to be done correctly and without delay to preserve the Debtor’s former and present employees’ savings. 23. The Proskauer lawyers working on these issues, Lisa Herrnson and

Ira Bogner, have been walled off from the DL lawyers who found new opportunities at Proskauer as the Firm’s operations began to unravel. 24. Proskauer was retained by the Debtor in connection with : (a) a

litigation commenced by the PBGC that sought termination and PBGC trusteeship of 15

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the Debtor's three PBGC-covered pension plans, with a termination date of May 11, 2012, for each of the plans, and (b) a subpoena that was served by PBGC on the Debtor independent of the litigation. Proskauer was asked to serve as lead litigation counsel in these PBGC-related matters because, while the Keightley & Ashner firm is a specialist in issues pertaining to PBGC and plan terminations, it does not ordinarily conduct active litigation. Proskauer's work was largely necessitated by PBGC's insistence on proceeding with an expedited schedule notwithstanding the parties on-going dialogue to reach a resolution without resorting to litigation. In fact, PBGC refused to agree to a short adjournment of the Order to Show Cause hearing date, as well as the due date for responding to the subpoena. In light of PBGC's position, the Court presiding over the PBGC litigation also denied the Debtor's request for a short extension. Proskauer thus prepared and filed the brief in response to PBGC's Order to Show Cause and responded to the subpoena. These activities supplemented, without duplicating, the efforts of K&A. Even though PBGC creates the impression that the Debtor ultimately conceded the arguments advanced by PBGC, the agreement was in fact contingent on substantive concessions made by PBGC in connection with its status and rights in the bankruptcy proceedings that were considered material to the Debtor and its creditors. This matter has been concluded. 25. Proskauer’s proposed representation of the Debtor in WARN re-

lated matters does not present a conflict of interest. Of the 53 former partners and employees employed by Proskauer only approximately 5 associates and 13 staff persons may have WARN claims against the Debtor as the balance were either employed in foreign offices, were partners, summer associates, or voluntarily resigned from the Debtor to join Proskauer and thus fall outside the protections of the WARN Act. (Proskauer currently employs approximately 465 associates and 821 staff persons.) Proskauer is 16

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not representing these individuals and has established an ethical wall. Proskauer has no stake in the outcome of the WARN action. 26. Additionally, Proskauer will be retained to provide day to day em-

ployment advice. The work for which Proskauer is being retained is highly specific, discrete and necessary to the administration of the Debtor’s estate and falls squarely within the ambit of Bankruptcy Code section 327(e). As detailed in the supplemental declaration of Lawrence Sandak (the “Sandak Declaration”) in support of this Reply, the potential conflicts noted in the Objections are entirely unrelated to the work being performed by Proskauer and the services it proposes to render going forward. In addition, on the issue of the tax-qualified status of DL’s plans, the interests of the estate and the former DL partners and employees now at Proskauer are completely aligned. Moreover, it would be inefficient and costly for a new firm to address the limited work to be completed by Proskauer. Accordingly, the Debtor submits that the Proskauer Application be approved on the limited basis set forth in the Sandak Declaration. D. The Sitrick Retention 27. Contrary to the assertions of the UST and the Committees, Sitrick

provided several key communications functions for the Debtor immediately following the commencement of the Chapter 11 Case, as described in the supplemental declaration of Michael Sitrick in support of this Reply (the “Sitrick Declaration”). For example, Sitrick was responsible for drafting and disseminating letters to all landlords of properties housing DL offices and storage facilities. Sitrick also worked with the wind-down team on several employee memos surrounding payroll and benefits. Contested issues relating to the approval of the use of cash collateral caused a delay in payroll immediately following the filing and needed explanation for the ongoing employees. Further employee memos regarding developing incentive plans and duration of employment 17

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were also drafted by Sitrick. In addition to document preparation, Sitrick provided an information hotline available to all constituencies with questions regarding the filing. All hotline calls were logged and provided to the wind-down team daily for informational or follow-up purposes. 28. Additionally, the Chapter 11 Case garnered major media attention

globally. Sitrick also served as a conduit for the media following the filing, which allowed the wind-down team to focus on its assignment instead of fielding media calls. Sitrick drafted media statements and talking points that were used with the media. Sitrick also monitored media coverage to help ensure accuracy in the reporting. 29. Like K&A, Sitrick has agreed that it will not provide services to the

Debtor after July 9, 2012 absent further authorization by the Court. However, Sitrick’s post-petition services described above and in the Sitrick Declaration were necessary and beneficial to the Debtor’s estate, and the Sitrick Application should be approved and a retention order entered so that Sitrick may file an application with the Court seeking allowance of its post-petition fees and expenses. E. The On-Site Retention (i) Overview 30. Contrary to the UST’s Objection, it is appropriate for the Court to

approve the retention of On-Site for the purpose of providing collection assistance for certain of the Debtor's Accounts Receivable under the contingent fee agreement set forth in that certain Receivables Liquidation Agreement between the Debtor and OnSite. Because the Receivables Liquidation Agreement calls for compensation on a contingent basis, retention of On-Site should be “pre-approved” under section 328(a) of the Bankruptcy Code and the principles set forth in In re Smart World Technologies, LLC, 553 F.3d 228 (2d Cir. 2009). 18

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31.

The UST erroneously argues that a professional employed under

section 328(a) pursuant to a contingent fee agreement should not be pre-approved so that professional can share the risk of “an inequitable result” with other professionals. Despite Smart World and orders of this Court in the Thelen LLC case attached to the Declaration of George Abodeely in support of this Reply (the “Abodeely Declaration”), the UST still complains that it, and other parties in interest, will be denied a second bite of the apple to reconsider the contingency fee due each month to On-Site out of its collections, yet the Objection never explains what review of a fee based on a percentage of collections it could undertake. 32. The UST asks this Court to turn down a good deal for the estate

and for On-Site. The Debtor’s Chapter 11 estate will obtain the services of the nation’s premier law firm accounts receivable consultants on a contingent fee basis, with only a modest minimum guarantee and expense allowance. The quid pro quo is that payment of the contingent fees earned are to be made monthly and that there is no need for any further review of commissions earned by On-Site. (ii) The On-Site Receivables Liquidation Agreement is a Contingent Fee Contract that is Appropriate for Pre-Approval 33. Although the UST Objection notes in passing that the Receivables

Liquidation Agreement is a contingent fee agreement (Objection, at ¶34), the UST seeks to hold On-Site to standards that apply to professionals who are to be compensated on an hourly fee basis. In Smart World, the Second Circuit affirmed the pre-approval of a law firm contingent fee agreement under 11 U.S.C. § 328(a), including that portion of the order providing that no further review of fees was required. See In Smart World, 352 F.3d 228 at 234.

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34.

Similar to the order in Smart World approving the attorneys’ con-

tingency fee agreement, On-Site is to be employed as a collection agent to perform the specific task of collecting the Debtor’s accounts receivable portfolio for the benefit of the estate. There should be no doubt that pre-approval of a contingent fee agreement for the type of services to be rendered by On-Site is appropriate. 35. As noted in Smart World, the essence of a contingent fee is to shift

the cost of paying cash for services and the risk of loss from the estate to the professional. In return, the professional expects its contingent fee to be honored by the Court and not to be penalized for success. Otherwise, it would not be possible nor prudent for the professional to assess the risk it has undertaken to work for the estate. Thus, the UST’s concern that On-Site would not share in the risk of an insolvent estate misses the point. On-Site already is risking the amount of its compensation by taking on a contingent fee contract. Not only would it would be manifestly unfair to subject On-Site to a second risk of administrative insolvency, it also would be contrary to the holding in Smart World, a case upon which the UST expressly relies. This is especially true because On-Site has agreed to pay out of its monthly payments a retention bonus to key employees of the Debtor. 36. On-Site is the nation's premier collection service specializing in law

firm receivables. On-Site's experience is second to none in this field, having worked upon the liquidation of most major law firms during the past several years, including Thelen LLC, Heller Ehrman LLC, Brobeck LLC and Howrey LLC. In each of these cases, bankruptcy courts have approved variations of the Receivables Liquidation Agreement authorizing payment to On-Site, without further application for fees on a strictly contingent basis. Most recently, this Court pre-approved On-Site’s Receivables

Debtor) would be denied the right to review the contingent fees paid to On-Site, but the Objection never explains what review could be undertaken. Short of an arithmetical error in calculation of the commission, the essential purpose of a contingent fee agreement is to base payment to the professional on a percentage of the amount collected. Under Smart World, there are no factors other than collection to consider. No doubt the Debtor will report collections and each commission payment in its monthly operating reports, which should provide all parties in interest with ample opportunity to review the calculation of every disbursement. (iii) On-Site's Services are Necessary and Do Not Overlap With Any Other Professional’s Services 38. The UST confuses the duties of On-Site with those of Zolfo Cooper.

As described in the Abodeely Declaration, On-Site's tasks are narrowly tailored and strictly limited. See Abodeely Decl., ¶4. These carefully described tasks are set forth in both the On-Site Application and in the Receivables Liquidation Agreement. It should be apparent from a close reading and comparison of each of the retention applications of On-Site and Zolfo Cooper that there is a clear distinction in tasks, rather than an overlap. On-Site is a consulting firm that deals specifically in managing the accounts receivable portfolio of a law firm and in working through that portfolio to maximize collections for the benefit of the estate. In undertaking its tasks, On-Site will do the leg work, making certain that invoices are rendered, follow up with contacts at account debtors that are the Debtor’s former clients and that collections are received by the Debtor. On-Site has no independent decision-making power and will not be duplicat-

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ing any of the tasks of Zolfo Cooper. In contrast, Zolfo Cooper will be the decision maker with respect to collecting accounts receivable on any terms other than those set forth in the invoice. On-Site will take charge of the Debtor's accounts receivable system, will operate it, and provide such reports as contemplated in the agreement and reasonably necessary to Zolfo Cooper for its use in winding down the financial affairs of the Debtor during this liquidation process. There will be no overlap of functions between On-Site and Zolfo Cooper, as Zolfo Cooper is not going to be handling the dayto-day collection of receivables and On-Site is not going to be making decisions as to terms for collection of any particular receivable other than in accordance with the procedures delineated in the Receivables Liquidation Agreement and the Final Cash Collateral Order. 39. The UST also questioned the need for arbitration/litigation prepa-

ration services relating to receivables. In the Receivables Liquidation Agreement, those services are specifically identified as being separate and apart from normal collection services. In the event it is necessary to refer a particular account receivable to an attorney for collection, On-Site's percentage of recovery will be measured by a different contingency, in such case 5% of the net amount collected per receivable because of the additional services that will be required to be performed by On-Site. It should be noted that the Debtor may no longer have significant personnel to provide services such as preparing invoices, payment histories and materials for use by counsel in collection actions and providing testimony if and when needed. It should also be noted that these services are used only upon specific request by the Debtor and, thus, Zolfo Cooper will no doubt use discretion to determine whether or not to use On-Site to assist in the preparation of litigation to collect receivables in carrying out its tasks as CRO.

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(iv)

On-Site's Retainer Is an Advance Payment and Minimum Guarantee of Compensation 40. Although On-Site's contact compensation is contingent, On-Site

and the Debtor negotiated a minimum compensation guaranty of $150,000. Due to an arithmetical error, the Debtor paid only $122,947.26 of that advance before the case was commenced. Therefore, the Debtor and On-Site reached agreement that upon approval by this Court, the Debtor would fully fund the retainer to reach the contractually agreed sum of $150,000. 41. This prepayment and minimum compensation are highly unlikely

to add one more cent to the amount earned by On-Site. In this matter, a minimum amount is appropriate to cover On-Site's considerable expenses in setting up its staff to master and control the Debtor's sophisticated accounts receivable and billing systems and to address the early stages of this engagement for On-Site before collections are received. On-Site is a very small company, and while it is willing to take a large risk in committing its staff to this major project for an appropriate amount of time on a contingent basis, the parties agreed that it was appropriate for On-Site to receive a minimum compensation that almost certainly would be earned. 42. The Receivables Liquidation Agreement provides for the minimum

compensation to be earned at the end of the term of On-Site’s contract, obviously, to ensure that the risk that On-Site takes is no greater than the risk of collecting the receivables. To paraphrase former Bankruptcy Judge Blackshear, the reasonableness of the contingent fee is inherently addressed because the professional “doesn't get paid if he doesn't bring in anything.” In re Smart World, 352 F.3d at 234.

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(v)

The JPMorgan Chase Engagement Has Been Completed 43. The UST requested that On-Site confirm that the JPMorgan en-

gagement with respect to this Debtor has been completed, and On-Site has done so. See Abodeely Declaration, ¶ 5. (vi) None of the Advance Goes to Pay Expenses 44. The UST misinterprets the nature of the advance paid to On-Site. It

is a retainer that is a minimum guaranteed compensation sum, applied against contingent fees that are earned, but it does not apply to expenses. On-Site and the Debtor agreed that the Debtor would pay up to $20,000 of On-Site's expenses in the first year and that On-Site would bear the cost of all expenses above that amount. No portion of the retainer is applied against expenses. 45. In the event that the Receivables Liquidation Agreement is not ap-

proved, On-Site reserves the right to seek compensation for services rendered to date on a quantum meruit basis or to renegotiate the terms of the Receivables Liquidation Agreement to address any concerns that might be identified by the Court and any added risk that might be created. F. The DSI Retention 46. The UST’s Objection relating to the DSI Application mistakenly as-

serts that DSI’s services overlap with those of On-Site and Zolfo Cooper. In addition, the UST inquires as to whether DSI will apply the remaining balance of its pre-petition retainer to its first interim fee award. 47. As detailed in the Declaration of William A. Brandt, Jr. in support

of this Reply (the “Brandt Declaration”), DSI has not and will not provide any services related to the collection of the Debtor’s account receivables.

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48.

Additionally, DSI has not and will not undertake assignments

which overlap with those of Zolfo Cooper and will coordinate with Zolfo Cooper and other professionals solely for the purposes of delineating the scope of work, to report on the status of DSI’s activities and to avoid duplication or inefficiencies. 49. It bears noting that the Debtor anticipates that DSI’s work on behalf

of the Debtor’s estate will be completed by the end of July. Accordingly, it is expected that DSI’s first interim fee application will also be its final application. 50. DSI has agreed to apply the remaining balance of its retainer to sat-

isfy whatever fees and costs it may be awarded by the Court. G. Proposed Application of Togut Firm’s Pre-Petition Retainer Is Reasonable and Appropriate 51. As of the Petition Date, the Debtor’s professionals held retainers

with a balance of approximately $1.2 million.2 The UST and Committees demand that these pre-petition retainers be applied against the first interim fees approved by the Court. This demand should be overruled because: (i) retainers are an appropriate and well-recognized form of compensation for a Debtor’s professionals in Chapter 11 cases and have been approved in other cases in this jurisdiction and others on similar facts; (ii) the Debtor’s pre-petition secured lenders agreed to the use of their cash collateral to pay the Togut Firm’s approved post-petition fees and expenses pursuant to a budget that was incremental to the retainer following extensive negotiations with respect to the Final Cash Collateral Order that the Committees participated in; (iii) the Togut Firm will be prejudiced if the retainer structure is altered after the budget negotiated in con_________________________
2

The retainer balances as of the Petition Date are as follows: (i) Togut Firm, approximately $400,000; (ii) DSI, approximately $268,000; (iii) On-Site, $122,947.26; (iv) Zolfo Cooper, approximately $290,000; (v) Goldin, approximately $115,000; and (vi) K&A, approximately $7,000.

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nection with the Final Cash Collateral Order has already been finalized and approved by the Court; (iv) the purpose of the Togut Firm’s retainer in this case will be undermined if the Togut Firm is required to apply the retainer at the outset of the Chapter 11 Case; and (v) to the extent applicable, the relevant factors that courts consider in approving “evergreen” retainers are satisfied in this case. 52. As noted, the Bankruptcy Court for the Southern District of New

York has approved retainers similar to the one proposed here. Most significantly, in the second Saint Vincents Catholic Medical Centers of New York Chapter 11 Case No. 10-11963 (CGM), the Court overruled a similar objection by the UST and upheld the Debtor’s main bankruptcy counsel and financial advisor’s proposed retention of retainers until the conclusion of the cases pursuant to the negotiated terms of the Court’s order approving post-petition financing. A true and correct copy of the relevant portion of the transcript reflecting Judge Morris’s bench decision is annexed as Exhibit “1” to this Reply. Numerous retention orders in this District provide for similar relief.3 _________________________
3

In re CIT Group, Inc., No. 09-16565 (ALG) (Bankr. S.D.N.Y. Dec. 21, 2009) (retention order authorizes counsel to hold “a postpetition evergreen retainer to be applied against any amounts approved by the Court in connection with any ... final fee application in these cases”); In re Cabrini Med. Ctr., No. 09-14398 (AJG) (Bankr. S.D.N.Y. Mar. 29, 2010) (second interim fee application, ¶ 28) (indicating that “[p]ursuant to its engagement letter and the Retention Order ... the balance of the retainer is being held in escrow until [counsel] is paid for all of its post-petition fees and expenses at the conclusion of this case”); In re Our Lady of Mercy Med. Ctr., 07-10609 (REG) (Bankr. S.D.N.Y. Aug. 30, 2007) (first interim fee application, ¶ 45) (noting that “[p]ursuant to its engagement letter and the Retention Order, the balance [of the retainer] is being held in escrow until [counsel] is paid for all of its post-petition fees and expenses at the conclusion of these cases”); In re Mark IV Indus., Inc., No. 09-12795 (SMB) (Bankr. S.D.N.Y. May 28, 2009) (retention order) (authorizing counsel to hold portion of retainer remaining after satisfaction of prepetition charges and apply it against final fee application); In re BearingPoint, Inc., No. 09-10691 (REG) (Bankr. S.D.N.Y. Aug. 14, 2009 & Mar. 1, 2010) (first interim fee application, ¶ 12; final interim fee application ¶¶ 7, 15) (first interim fee application indicating that counsel would retain retainer “and apply it towards any amounts owing as of the final fee applications considered by the Court,” and final fee application indicating that retainer had been so held); In re Lenox Sales, Inc., No. 08-14679 (ALG) (Bankr. S.D.N.Y. Sept. 15, 2009 & Feb. 16, 2010) (second interim fee application, ¶ 12; final interim fee application ¶¶ 7, 15) (second interim fee application indicating that counsel would hold retainer “and apply it towards any amounts owing as of the final fee applications considered by the Court,” and final interim fee application indicating that retainer had been so held).

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53.

The Saint Vincent’s Court relied on a Delaware Bankruptcy Court

decision that permitted a Chapter 11 debtor’s attorneys and financial advisors to hold “evergreen retainers negotiated with the debtor through arms-length bargaining.” In re Insilco Technologies, Inc., 291 B.R. 628, 633 (Bankr. D. Del. 2003). An evergreen retainer, the Court explained, is similar to a security retainer, in that it is to secure payment of fees for future services; however, an attorney holding an evergreen retainer does not look to the retainer for payment of fees until the approval of the final fee application, and will be paid his interim fees and expenses out of operating cash. Id. at 632. The Court explained that payment of such retainers is a common practice in the marketplace and approval of such retention arrangements enables debtors to maintain relationships established prepetition with their professionals. Id. at 634. The Court held that retainers provide a reasonable mechanism for minimizing risk in a Chapter 11 case filed by debtors whose liabilities far exceed their assets. Id. at 634-35. 54. The factors considered in Saint Vincent’s and Insilco, included, but

are not necessarily limited to (i) whether terms of an engagement agreement reflect normal business terms in the marketplace; (ii) the relationship between the Debtor and the professionals, i.e., whether the parties involved are sophisticated business entities with equal bargaining power who engaged in an arms-length negotiation; (iii) whether the retention, as proposed, is in the best interests of the estate; (iv) whether there is creditor opposition to the retention and retainer provisions; and (v) whether, given the size, circumstances and posture of the case, the amount of the retainer is itself reasonable, including whether the retainer provides the appropriate level of “risk minimization,” especially in light of the existence of any other “risk-minimizing” devices, such as an administrative order and/or a carve-out. Id. at 634.

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55.

All of the above factors support the Togut Firm’s proposed retainer.

As explained above, many of the Debtor’s professionals have nearly completed their work in the Chapter 11 Case and anticipate that their first interim fee application will also be a final application. However, as the Debtor’s main bankruptcy counsel, the Togut Firm must see the Chapter 11 Case through to completion. With this in mind, the Togut Firm negotiated a retainer, Final Cash Collateral Order and budget at arms length with its Pre-Petition Lenders with terms that minimize some (but far from all) of the significant risks associated with serving as main bankruptcy counsel to a liquidating Chapter 11 Debtor. 56. Specifically, the Togut Firm negotiated a budget of $1.45 million to

be paid from cash collateral on account of its fees and expenses for the nine-week period from May 29, 2012 through July 31, 2012. The approximately $400,000 remaining under the Togut Firm’s pre-petition retainer is incremental to this budget. As in Saint Vincent’s, Insilco and the litany of other Chapter 11 cases in this District cited above, it is entirely reasonable and appropriate for the Togut Firm to have negotiated an evergreen retainer as security for the payment of services rendered to the Debtor. 57. Additionally, it bears emphasizing that, as was the case in Saint

Vincent’s, under the Final Cash Collateral Order, if estate professionals are required to resort to the “Carve Out” for the payment of fees and expenses, the Final Cash Collateral Order contemplates that the Carve-Out will only apply to fees and expenses incurred after the “Termination Declaration Date.” See Final Cash Collateral Order ¶ 16(c). Thus, the pursuant to the terms of the Final Cash Collateral Order and Togut Application, the Togut Firm will apply its retainer to satisfy approved fees and expenses for services rendered prior to the Termination Declaration Date before sharing in the Carve-Out reserved for estate professionals. The qualifying language “for services 28

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rendered after the Termination Declaration Date” in decretal paragraph 16(c) was added to the Final Order specifically to clarify the Creditor Committee’s comment to the Interim Order to delete the language in decretal paragraph 16(c) of Interim Order that provided for “exclusive of the application of any retainers by any of the Case Professionals.”4 58. The cases cited by the UST for the proposition that retained profes-

sionals in the Southern District of New York typically draw down on pre-petition retainers upon the Court’s approval of the professional’s first interim fee application are easily distinguishable. In AMR, Almatis, General Motors and Chemtura, the prospect of an ultimate distribution to unsecured creditors was not in question. In Chrysler, the United States Treasury funded the Chapter 11 case and did not impose a budget on professional fees during the initial stages of the case. In contrast, here, the prospect of recoveries for unsecured creditors is in doubt. 59. The Togut Firm’s retainer, as currently structured in conjunction

with the Final Cash Collateral Order, was a key component of the Debtor’s ability to retain the Togut Firm in this Chapter 11 Case notwithstanding the potential for administrative insolvency. The Debtor’s counsel in AMR, Almatis, General Motors and Chemtura faced no such concern. To disallow the Togut Firm’s retainer under the circumstances of this particular case would be inequitable, and would have negative repercussions on

_________________________
4

Decretal ¶ 16(c) of the Interim Order provides: “From and after the Termination Declaration Date, any payment or reimbursement made in respect of any Debtor Professional Fees or Committee Fees and Expenses (exclusive of the application of any retainers by any of the Case Professionals) for services rendered after the Termination Declaration Date and allowed by the Court shall permanently reduce the Carve Out Cap on a dollar-for-dollar basis.” As noted, the Final Cash Collateral Order was revised to exclude the proviso making clear that retainers will be applied before the Carve Out.

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a debtor’s ability to retain professionals in future cases where administrative solvency is uncertain. 60. Based on the foregoing, the Debtor submits that the Togut Firm be

permitted hold and apply its retainer to unpaid post-Petition Date fees and expenses of the as allowed by the Bankruptcy Court, as proposed by the Togut Application. CONCLUSION WHEREFORE the Debtor respectfully requests that the Court overrule the Objections and grant the relief requested in the Retention Applications, as modified herein and the various Declarations submitted in support hereof, and grant such other and further relief as it deems just and proper. Dated: New York, New York July 5, 2012 DEWEY & LEBOEUF LLP By its Proposed Counsel TOGUT, SEGAL & SEGAL LLP By: /s/ Albert Togut ALBERT TOGUT SCOTT E. RATNER LARA R. SHEIKH One Penn Plaza, Suite 3335 New York, New York 10119 (212) 594-5000